Category Archives: word definitions

Finance Terms definition

Credit Risk:

The risk of the loss arising on account of non-payment of interest or principle dues by the debtor, the two components of credit risk are “Ability to pay” and “willingness to pay”.

Credit score:

A credit score is a numerical expression on a statistical analysis of a entities credit files, to represent the creditworthiness of the entity.    The scores range from 300-850, lower score indicating that higher chance of defaulting on a loan and the higher score representing a better chance that the lender will get repaid back.

Collateral:

The property/assets made available by the barrower as a security against a loan, which can be seized in case of default.

Debt Instruments:

A written promise to repay a debt, for example bills, bonds, notes, CDs, Commercial papers and bankers acceptance.

Contingent Liability:

Contingent Liability is a liability, which may or may not occur. It will be decided by the future actions of the organization. That means, the future action will decide an activity as liability or not

Liability:

The word liability refers to fault. The person, who is at fault, is liable to another because of her/his actions or failure to act. The liability simply describes some form of obligation or responsibility. It represents the payment provided for damage caused through actions or negligence.

Obligation:

            The action of binding oneself by social, legal or moral tie (OR) The constraining power of promise, contract or sense of duty (OR) Any debt, written promise or duty

Credit Exposure:

            The potential for loss in the event of default

Credit Risk:

            Risk due to uncertainty in a counterparty’s ability to meet its obligations

Expected Loss:

            Expected value of losses due to default over a specified horizon given the exposure and historical performance. This can be thought of us what is expected to be lost on average

EL = PD * LGD * EAD

Probability of Default (PD):

            The likelihood that a barrower will not be able to pay its credit obligations, commonly measured as a percentage applied to the next 12 months.

Loss Given Default (LGD):

            The fraction of credit exposure that will not be recovered in the event of default on a specified obligation

            The loss sustained by the lender after the barrower defaults

Exposure at Default (EAD):

            The amount of credit a lender has extended or is obligated to extend at the time of default.     

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